The fate of Russian gas exports to Europe remained a key concern as the Ukraine crisis moved into a new phase on 16th March, with an overwhelming vote by the people of Crimea to become part of Russia. The hastily convened plebiscite – the result of which was never in doubt – has been roundly condemned by western powers and it now remains to be seen what Russia’s President, Vladimir Putin, will do next . . . and how western powers will respond.
In the short term gas continues to flow as normal but many question marks hang over what may happen in the medium to long term. Russia currently accounts for almost a third of gas imports into Europe and more than half the volumes still flow through Ukraine, despite Russia’s efforts to develop alternative export routes such as Nord Stream.
Bizarrely, there have been suggestions from both sides of the stand-off between Russia and western powers that gas exports to Europe should be constrained – either to punish Russia for its incursion into Ukraine or as a tit-for-tat response by Russia to western sanctions.
The biggest threat to supplies in the short-term, however, stems from a payment dispute between Russia and Ukraine, which has not been able to pay in full for gas supplied in February. Gazprom chief Alexey Miller warned on 7th March that “We cannot supply gas for free. Either Ukraine redeems debt and pays for the current deliveries, or there is a risk to return to the situation of early 2009.” Gazprom has already announced that a discount arranged in December for gas supplied to Ukraine will be cancelled from next month, because of non-payment issues.
Is US LNG an answer? What is becoming clear is that political pressure is intensifying for Europe to wean itself off Russian gas over time, perhaps by looking to LNG exports from the US. That said, US LNG exports will not begin until late 2015/early 2016 and will not reach the kind of volumes that would make a significant impact until into the 2020s. Moreover, US LNG exporters are primarily targeting markets in Asia Pacific where the price of gas is still largely determined by linkage to oil prices.
The utilisation rates of European LNG import facilities are currently low, giving Europe the physical capability to import large additional volumes of LNG. However, the tightness of the LNG market means there would be significant price implications, not just for consumers in Europe but also those in Asia Pacific. European gas demand has already been depressed by high gas prices, especially when compared with the price of coal.
Robust system: For now the European gas industry appears confident that – with winter almost over and gas storage levels high – a disruption of supplies through Ukraine could be mitigated by diverting gas to other routes from Russia or from other export countries, whether by pipeline or as LNG.
In a statement issued on 11th March, Gas Infrastructure Europe (GIE) – an association that represents the interests of operators of transmission, storage and LNG import infrastructure – said: “Members of Gas Transmission Europe (GTE) have now assessed the supply situation in close co-operation with their national competent authorities and expect that most of the European transmission systems currently can withstand a disruption of Russian gas through Ukraine. The pipeline network is available for diverting gas flows in case of supply problems from Russia from storage and LNG to market.”
Data from Gas Storage Europe (GSE) showed that on 10th March there was 37 Bcm of gas in stock, with storage installations about 47% full. Gas LNG Europe (GLE) reported on the 9th March that there was 4.2 million cubic metres of LNG in stock in Europe, equivalent to around 2.5 Bcm of gas.
Russian gas transit pipelines to Europe (Source: J Stern, Chapter 3, in J. Henderson and S. Pirani, the Russian Gas Matrix, to be published by the OIES later this year.)
The big question, of course, is: how long could the system withstand a severe disruption of gas flows from Russia – were the political crisis to intensify – without hardship in those countries heavily dependent on Russian supplies? In January 2009 a dispute between Ukraine and Russia over gas prices and payments led to a two-week cessation of Russian supplies that had a major impact on some countries in south-eastern Europe.
OIES report: Despite its threat to suspend supplies to Ukraine, Gazprom appears to be doing all it can to avoid such a move. In a report on what the Ukraine crisis means for gas markets, recently published by the Oxford Institute for Energy Studies (OIES), the authors write: “Gazprom has been at pains to emphasise that it will continue deliveries and even offered to help arrange loans to Naftogaz Ukrainy to ensure payment and forestall a dispute . . .
“The difficulties that Naftogaz Ukrainy is having, and will have, in paying for Russian gas imports combined with the difficulties of negotiating a solution due to the political and military crisis, are the most likely potential cause of supply interruptions.”
(The report can be downloaded, free of charge, at: https://www.oxfordenergy.org/2014/03/what-the-ukrainian-crisis-means-for-gas-markets/)
Looking further into the future, the OIES authors believe that: “For Russian gas, the most significant effect of this crisis is most likely to be felt over the longer term: the perception of Russia as a secure source of gas supply is very likely to be undermined in Europe and the FSU, and possibly even in Asia.”
However, they also caution that Europe would not find it easy to wean itself off Russian gas: “Although the political fall-out from the current crisis might be a call for diversification away from Russian gas, Europe’s alternatives of LNG supplies, more renewables and more coal all involve complex issues and may impose additional financial and environmental costs.”
Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.